WISE MONEY

Issuing its final report on the banking crisis yesterday, the committee said it was still a “muddle” which part of the tripartite — made up of the Bank of England, Financial Services Authority (FSA) and Treasury — was in charge of strategic decisions.

The Treasury’s white paper proposed a new Council for Financial Stability, chaired by the Chancellor, which will oversee the Tripartite. This is just a “cosmetic” change, the Treasury Select Committee said.

The new council will be in addition to the Financial Stability Committee, which sits within the Bank.

The White Paper also gave more power to the Bank to monitor overarching stability — so-called macro-prudential regulation — but did not make it clear how that power would be separate from the responsibilities of the FSA.

“Where before no-one had a formal responsibility for financial stability, now many do — the Bank of England, the FSA, the Treasury, the Council for Financial Stability and the Bank’s Financial Stability Committee. Where responsibility lies for strategic decisions and executive action was, and remains, a muddle” the report said.

John McFall, the committee’s chairman, also said that the Government should not rule out imposing a split between retail and investment banking.

Such a measure, which would echo the restrictions imposed in the 1930s in the US under the Glass-Steagall Act, has been widely criticised among banks which argue that the law is outdated.

But Mr McFall said that banks have been able to “hold the taxpayer to ransom” by growing so large that they present a serious systemic threat, making it impossible for the Government to do anything but bail them out during the downturn.

In order to prevent banks from becoming so large again, the Government should “not rule out drastic action, such as forcibly shrinking the banks or separating out the riskier functions,” Mr McFall said.

Separately, the House of Commons’ Scottish Affairs committee said yesterday that the FSA failed to provide the “necessary level of supervision” over Dunfermline to prevent the downfall of Scotland’s largest building society.

It was the fault of Dunfermline’s board that the mutual embarked on risky lending on commercial property and buying loan books from other lenders, the committee said, but added that the FSA failed to issue “clear and specific warnings”.

The FSA rejected the charge, saying that it had written to Dunfermline in December 2005 soon after a regulatory “Arrow” visit, identifying the growing size of its commercial lending portfolio as a risk.

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The body, which is in charge of the Government’s 70 per cent stake in Royal Bank of Scotland and its 43 per cent holding in Lloyds Banking Group, also refused to give an indication of when it expected to dispose of the shares in the lenders.

The UKFI said today that every household in the country has more than £3,000 invested in Lloyds and RBS shares

The UKFI said: “Our own task of returning these investments to the private sector is challenging.

“The amounts involved are very large, and a successful disposal of our holdings will require professionalism and patience.”

The losses in the banks is less than the £18.1 billion shortfall revealed in February.

UKFI’s report makes clear that it could be years before RBS and Lloyds are back in private ownership, although the ultimate decision on any disposal will be taken by the Treasury.

It adds that the most likely exit for the labour Government will be through an initial public offering of the stakes.

“While there are many possible approaches open to us, including strategic sales, our central assumption in thinking about our disposal programme is that we are likely to be selling shares to investors in the public equity markets,” said the government body this morning.

The Government’s stakes in RBS and Lloyds will increase when the Treasury’s insurance scheme — the Asset Protection Scheme — kicks in. At that stage, taxpayers will probably own more than 80 per cent of RBS and more than 60 per cent of Lloyds.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The warning is doubly sobering since S&P; last month placed Britain’s debt on to “negative outlook” – an explicit signal that it could soon be downgraded.

Although the agency calculated two years ago that the effects of an ageing population, alongside high pensions and healthcare costs could push Britain’s net debt up above 150pc by 2050, it now fears the added cost of the financial crisis means the debt mountain could in fact rival that in 1945, when the cost of fighting a world war pushed debt well beyond 200pc of GDP.

The warning coincides with research showing that the true size of the UK’s unfunded public sector pensions deficit, which needs to be funded through taxpayer’s cash, is now £1,177bn – a staggering £20,000 for every person in the UK.

A study for the highly respected British North American Committee, written by former Bank of England economist Neil Record, finds that the UK shortfall is far more severe than in the US or Canada.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.